Bhansali Engineering Polymers – Margins back on track after three weak quarters
Bhansali Engineering Polymers (BEPL) reported good set of numbers. Revenues grew 55.3% YoY to Rs 3,133m on back of strong YoY volume growth of 72% (lower volumes in Q1FY19 due to fire) but declined 10.4% QoQ as volumes were lower sequentially by 9.4%. Gross margins were normalized (more than doubled QoQ to 20.3%) as there was no impact of high cost inventory. This was in line with management guidance. Thus, in spite of sequential increase in employee costs and other expenses EBITDAM expanded 730 bps to 9.3%. YoY EBITDAM were down 440 bps due to lower GRMs. EBITDA was at Rs 291m vs Rs 275m in Q1FY19 and Rs 70m in Q4FY19. GRM stood at Rs 41.1/kg and adj. EBITDA at Rs 17.5 for the quarter. PAT grew 1.3x YoY and 7.6x QoQ to Rs 219m.
We believe that
A) Margins are likely to stay normalized as no major increase in RM prices is expected,
B) The underlying challenge is not in selling volumes but selling at the desired level of profitability,
C) Auto demand continues to stay muted and is likely to remain so for a couple more quarters,
D) 20% volume growth can be sustained for the next 3 years from current capacity.
Going ahead we expect per kg EBITDA spreads to improve to Rs 16.2 in FY20E and to Rs 17.8 in FY21E (compared to previous assumptions of Rs 15.2 and Rs 16.7) as all high cost inventory has been utilized. But as we have revised our volume assumptions downwards by 10.9% for FY20E & FY21E to 69,104 tons and 89,924 MTPA due to the prevalent headwinds in the end user industry Revenue/EBITDA forecasts stand lowered by 9.7%/4.0% in FY20E to Rs 12.5bn/Rs 1.1bn and 10.1%/4.8% in FY21E to Rs 14.3bn/Rs 1.5bn. In spite of such downward revision, PAT estimates are higher by 7.3%/3.6% to Rs 757m/Rs 980m respectively primarily due to higher other income.
Margins have normalized after three weak quarters which were impacted by forex and inventory losses. The worse seems to be behind but as the stock appears oversold there is limited downside from current levels. At the CMP, stock trades at 12.9x FY20E and 10.0x FY21E earnings estimates. We maintain long term BUY rating and target price of Rs 97.
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